As the next generation of wealth generators and inheritors (the “NextGen”) emerges, expectations that clients have on their trustees is evolving.
Having grown up with data at their fingertips, the NextGen expects information to be visible and instantly accessible. These clients are used to having their needs met immediately. With increased speed and access, comes an inevitable increase in risk, particularly surrounding wealth data.
To effectively mitigate these risks, service providers must first understand some of the key potential challenges facing private clients – in particular high-net-worth families – and their trustees.
1. A matriarch/patriarch passes away with no succession plan in place
Succession planning is the core of what we do as trustees. From a lack of transparency with NextGens (eg the patriarch/matriarch did not share information) to a lack of understanding around non-standard assets, there are no shortage of stories of the lengthy, costly, and complex consequences of families who did not have plans in place.
When the head of a family passes away, familial dynamics inevitably shift. This shift can, and often does, align with Tuckman’s four stages of group development:
- Forming: Where new positions are appointed/taken, eg a NextGen moving into a leadership role within the family.
- Storming: As the new hierarchy develops, contentious matters are likely to arise. For example, disagreements over how assets should be distributed, or how much individuals should contribute to family business operations.
- Norming: Where disagreements and personality clashes are resolved, and a new status quo is established.
- Performing: Where the family is content with the new dynamic and return to a focus on meeting business, financial and personal objectives.
For each of the four stages, a trustee can be an invaluable as an impartial mediator and a clear succession plan can ease potential conflicts or even prevent them being triggered.
Trustees should have regular conversations with the matriarch/patriarch to ensure any succession plan in place is up-to-date and reflective of their wishes. They will also seek to engage NextGens – where possible and appropriate – to ensure transparency to a centralised store of information.
2. Litigation around underperforming assets in trusts
The primary source of litigation against trustees tends to surround the performance of assets. This is particularly relevant as the NextGen begins to scrutinise asset performance more closely.
Historically, a notorious lack of transparency in some wealth sectors may have deterred clients from taking legal action against their service providers. In our view, the welcome introduction of regulatory measures such as the Common Reporting Standard over several years ‘cleaned out’ undeclared structures. This increased transparency and, with it, accountability as the likelihood of legal action for underperformance increased.
Despite delegating specialist roles – such as asset and investment management – to expert intermediaries, trustees remain accountable for ensuring that performance does not fall below expectation. Utilising technology for reporting can help enhance performance tracking and support trustees in meeting this obligation.
3. Lack of benchmarking across diverse assets
The growing diversification of assets presents challenges in benchmarking performance. For example, it is not possible to gauge performance of digital assets against years of data – as you may be able to with art or wine – simply because digital assets have not been in place long enough.
It is important for trustees to have access to, and regularly review, market comparables to give a clear performance picture to beneficiaries.
As family offices become more professional, there is an upward trend in families seeking to better understand and manage their private wealth. The benefits of structured, comprehensive information and effective communication cannot be underestimated in ultimately giving peace of mind that comes hand-in-hand with heightened organisation, experience and expertise.
4. Quantity and complexity of wealth data
Wealth data is becoming increasingly complex and costly to manage. Historically, families would generally use one bank and have a close relationship with one organisation with minimal, or no, input from other advisors/intermediaries. Clients often relied on their bank to provide quarterly or even annual updates with key information.
Today, increased compliance regulations, a growing interest from HNWs to be more actively involved in their wealth management, along with the expansion of a reliance on a wider range of service providers (e.g. investment managers and custodians) can leave clients overwhelmed with the amount of data their investments generate.
Trustees can support private clients, including family offices, by taking on the administrative burdens associated with managing their wealth data, giving clients have access to the information and analytics they want and need, while ensuring the confidentiality of this information
Forward-thinking trustees will partner with reputable technology companies to provide their clients access to advanced options including wealth consolidation platforms, which increase accuracy and reduce administrative burdens, as well as providing an enhanced view of their structure(s). It is no longer “good enough” for trustees to only provide traditional monitoring and decision-making services, they must actively seek to improve their tech suite, for benefits to be passed to their clients and providing clarity in the complex.
5. Inability to act quickly amidst global uncertainty
Global economics and politics have highlighted the need for quick decision-making capabilities. For example, high-profile events such as the collapse of Silicon Valley Bank in 2023, which went from solvent to broke over the course of a few days underscore the importance of being able to quickly identify and manage exposure to risk. These type of “shock events” have increased the demands of clients on their service providers.
Relationships between clients and their advisors has, in many cases, evolved from periodic communication to requiring immediate action and decision-making facilitation. This shift demands that advisors, including trustees, be prepared to act quickly, which requires them to keep abreast of changes, and have an up-to-date view of their client’s wealth data. The ability to ‘slice and dice’ data, and drill down into the small details of investment exposure is critical in working with families, and their financial advisors, to mitigate these risks.
Conclusion
Modern wealth management presents significant risks due to the evolving landscape of asset diversification, increased complexities of data, and the need for rapid decision-making in uncertain times.
Trustees can adapt by leveraging technology, maintaining robust governance structures, and ensuring clear communication to manage these risks effectively and maintain their seat as a trusted advisor at the family table.
This article was first published in TL4 Private Client Magazine Issue 17.
